How Should Taxation Inform Your Investments

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In 2012, the fact that Starbucks started paying tax made the news. Today, we’re still struggling with an awkward truth: that most companies around the world are able to choose how much tax – if any – they want to pay.

The tax Starbucks now pays is around £8.1 million per year; a huge amount by any standard. If every multinational based in the UK paid this much that’s £275 million added to the budget – and most companies in that category earn much more than Starbucks.

we think tax is part of corporate social responsibility.

The change in the coffee company’s practices came after public revelation of its dodgy practices. Within weeks of the leak, pressure from media and protesters resulted in a complete turnaround in Starbucks UK’s tax practices.

What’s interesting about a new, apparently unending saga of tax-avoiding multinationals is that it seems the vast majority of people believe it is unethical for a company to abuse tax loopholes; we think tax is part of corporate social responsibility.

The key word is responsibility. Because it is easy for multinationals to avoid tax at the moment, many consider paying it “philanthropic,” or optional. However, with mounting criticism for any other practice it might be – shock and horror – time for companies to start considering tax avoidance unethical.

By breaking down the issue of company tax avoidance into three questions, you can decide whether tax avoidance is something important to you and your ethical investments.

1. Where do they pay?

For the ethical investor, the question of tax isn’t just how much is paid, but also where it is paid: many consider it important that a company “give back” to the community. “Giving back” is part of corporate social responsibility, so to low taxes and in a country that isn’t hugely affected by the company’s actions can be seen as unethical.

Companies like those mentioned often avoid large amounts of tax in by basing their companies in countries with generous loopholes or tax incentives, such as Belgium, Ireland, or Bermuda. ActionAid found that in 2011, 98 of the FTSE 100 used tax havens.

In the UK, a conservative estimate of the “tax gap” between what companies should be paying and what they actually are paying is a whopping £4.1 billion. This is a massive loss in funding for the UK public – now imagine how devastating it would be in a developing country.

The developing world is losing more than an estimated $100 billion per year. If they weren’t robbed of this money, there’s a fighting chance these nations could become major players on the global economics stage; or at least provide adequate care for those affected by Ebola or drought. When it comes to a lack of funding in these countries it is sometimes corrupt corporations and not corrupt governments that are to blame.

2. How much do they pay?

Most of the largest companies in the UK – Shell, Lloyds Banking Group, Vodafone –paid no tax in 2014. When they’re all earning more than £30 billion each year, it’s hard to understand why.

It’s also difficult to comprehend that people are celebrating Google’s payment of £130 million in back taxes to the UK government; that’s only 3% of its earnings. Still, that’s better than Facebook: popular as ever, in 2014 it only paid £4,327.

These numbers are upsetting, but more worrying to the ethical investor is that Facebook and Google were once considered ethical investments. They both emphasised the role of corporate social responsibility in their company culture.

On the bright side, at least they were paying some tax. Compared to Starbucks and Vodafone, these are still ethical investments. Many companies consider their financial responsibility to shareholders greater than their responsibility to the public; and you might feel the same. If it is enough for you to know that Google is now making a token tax payment to the UK government, then you can continue to invest in them company.

3. How can I tell who is avoiding tax?

It’s not just “bad guys” like finance firms and coffee monopolies that avoid tax: even Google has been caught out. Incorporating tax avoidance into your criteria makes the already challenging task of ethically investing in a multinational corporation that much harder.

If you want to find out more about your potential investment’s tax behaviours, you can read the full list and breakdown of the FTSE 100’s 2011 tax havens here; or, more positively, check if they proudly wear the Fair Tax Mark.

Interestingly, increased public scrutiny of tax behaviour has led to companies changing their policy ahead of criticism. This would suggest that paying low or no tax isn’t necessary to the success of these companies; it’s just a bonus for them. Hargreaves Lansdown, a large financial services firm, has no tax haven subsidiaries; if they can still thrive in a field so dominated by offshore accounts, so can Google.

Although in the future we might see a legal crackdown on dodgy accounting, for now tax behaviour creates another series of uncomfortable questions for the ethical investor.

Want to make the decision easier? Why not complete our Ethical Investment Questionnaire? It’ll only take a few minutes…

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